There are different determinative factors which helps companies to formulate appropriate CLV formula which in turn helps them to calculate the relevant CLV of the respective customers. Based on the nature of business and industry sector, companies can include the right mix of these determinates to calculate the customer value and built appropriate strategy to built sound relationships with customers who contribute the most to the bottom line (Ulaga 2001). These factors can be either monetary or non-monetary factors. Monetary determinants are comparatively easy to calculate because of having numerical values. However, non-monetary values are subjective in nature and needs close look to predict the approximate values (Cokins 2006).
After knowing the right mix of customer value determinants, then can use these components to trace their right value as below:
Figure 1: Determinants of customer Value (Cokins 2006)
Monetary determinants of customer value
Customer Acquisition costs: This refers to the cost that is associated with acquiring a new customer. It is advisable to give best effort to retain the existing customer rather than focusing much on acquiring new ones as customer acquiring costs is much higher than customer retention cost (Stinnett 2005).
Recurring revenues: Recurring revenue refers to the income as a result of retaining the existing customer. One example of such is the revenue received by a mobile company or TV a channel company receives from their subscribers who pay them on periodically (monthly, yearly etc.) (Stinnett 2005). This is also sometimes called as the price paid by a consumer (Gupta et al. 2006).
Recurring cost to serve: Recurring cost is the direct cost that company has to bear to serve the customer. The difference in the price and cost is often presented as gross contribution margin (Collings & Baxter 2005; H.Bauer, Hammerschmidt & Braehler 2003).
Monetary value: Moneytary value checks how much a customer has spent in the most recent specified period (Peppers & Rogers 2004).
Cost of renewal and retention programs: This determinant refers to all costs including marketing coats spend with an objective to retain an existing customer (H.Bauer, Hammerschmidt & Braehler 2003).
Removal/Termination costs: This determinant refers to the costs incurred to terminate the relationship with a customer. This is also sometimes referred as termination costs of relationship with customer (H.Bauer, Hammerschmidt & Braehler 2003).
Time: This time is the duration reference on the basis of which customer value is projected. Some companies consider a specific time for calculation whereas other consider it as infinitive (Kumar, V, Ramani & Bohling 2004).
Retention rate: This determinant refers to the probability of retaining customer i.e. probability of customer to continue the relationship with the company. The retention rate directly affects the retaining revenue of any company (Kumar, V. & Ramani 2004).
Discount rate: The discount rate is a percentage on the basis of which the expected future value of a customer is calculated to the present value (Kumar, V. 2005).
Non-monetary determinants of customer value
Frequency: Frequency specifies how often a customer buys from the company. The higher the frequency, the higher is the customer valuable to the company (Peppers & Rogers 2004).
Regency: Regency refers to the date of a customerââ‚¬â„¢s most recent transaction (Peppers & Rogers 2004).
Customer Loyalty: Customer loyalty is highly important determinant which can in turn can bring positive effects to other determinants like recommendation behavior of customer (Al & Irina 2007). One of the factor that is closely related to this determinant is customer satisfaction (Al & Irina 2007).
Credibility Weighting: This determinant refers to the credibility of a customer in terms of their credit history or other factors (Brown et al. 2002).
Customer Attrition: This determinant the likelihood of customer to discontinue the relationship with the company i.e. this is the case of customer loss (Kumar, V. 2008). Some researchers also associate this determinant with the probability of customer repeat buying or being ââ‚¬Å“aliveââ‚¬ at time (Gupta et al. 2006).
Churn Propensity: This determinant helps companies to assess the likelihood of a customer to switch to a competitor. Company should give higher importance to the customers who tend to have churn behavior in the near future so they can be retained longer (Rosset & Neumann 2003). Scientific models such as dynamic churn models helps to predict the likelihood of customer leaving the company and also suggests proactive approaches to retain them (Kumar, V. 2008).
Up Selling: Upselling is the determinant that assess the likelihood of convincing a customer to higher profit project who was in fact planning to buy the lower profit product (Ismail 2002).
Cross Selling: Cross selling determinant helps company to assess whether a customer who buys a product is likely to buy another product from the company in near future. For example, if a company sells a golf clubs to a customer, they can predict that the customer is likely to buy golf gloves as well. Cross selling determinant helps to overcome the drawbacks of some traditional marketing strategies such as blanket mass-marketing and spray-and-pray programs (Cokins 2006).
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Recommendation behavior: A satisfied customer does not only tend to be local to the company but may also likely to refer the service/product to other customers. New customers gained through this channel helps companies to lower the acquisition costs (Berger & Nasr 1998; Woodruff 1997). This determinant is sometime also referred as gross contributions from reference activities of customer (H.Bauer, Hammerschmidt & Braehler 2003).
Other determinants: In addition to above determinants, other socioeconomic variable such as customersââ‚¬â„¢ age, income level, and gender can also be very useful to determine the customer value (Cokins 2006).
Cornelsen (2000) cited in Al & Irina (2007) has presented a model which helps to understand the customer value on broader perspective in both monetary and non-monetary terms as shown below.
Figure 2: Evaluation model for customer value
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